Spark's Chief Strategy Officer: The spillover effects of the rsETH security incident have exacerbated the DeFi market's potential cascading liquidation crisis.

monetsupply.eth, the lead strategist at Spark Protocol, stated on the X platform that as liquidity in the stablecoin market tightens, the current rsETH security incident may be entering a more dangerous phase. Approximately 16.5% of the ETH market is supported by rsETH. If the losses are evenly distributed across the mainnet and cross-chain environments, rsETH collateralized loans may face a 10%-15% discount under eMode. Furthermore, after the risk buffer is exhausted, ETH depositors may still bear a remaining 2%-3% loss. Under this expectation, ETH providers tend to exit as quickly as possible, locking market utilization at 100%. Borrowing rates are insufficient to incentivize cyclical leveraged positions like wstETH and weETH to actively deleverage and release liquidity. Simultaneously, due to the inability to withdraw ETH, users who borrowed USDT and other stablecoins using ETH as collateral also struggle to close their positions in a timely manner. Even with rising stablecoin lending rates, the original market incentive mechanism has been disrupted. monetsupply.eth further points out that in a "locked-in" state with 100% utilization, the DeFi market may face a cascading liquidation crisis and two major distorted incentives: First, ETH holders cannot adjust healthy collateral ratios, and liquidators cannot withdraw and sell collateral assets. If the price of ETH falls, bad debts may accumulate rapidly. Second, stablecoin depositors may have an incentive to achieve a "disguised exit" by lending out other stablecoins, locking in approximately 75% of their funds at a lower cost while still generating positive returns. For lending markets that rely on liquidity pools and recollateralization, liquidity must be prioritized. Aave's recent reduction in the maximum borrowing rate (slope2) cap is weakening deleveraging incentives and significantly increasing the risk of a cascading failure in the market.